Real Exchange Rates and Australian Export Competitiveness

This paper develops several summary measures of the real exchange rate, based on the international price competitiveness of Australian exports. The concept of a real exchange rate is briefly discussed, as well as a number of methodological issues relating to the construction of exchange rate indices. Using bilateral export weights and relative price levels, a summary bilateral exchange rate index is developed. A summary index based on third country export weights is also developed to take account of some of the weaknesses inherent in a bilateral index. The merits of other exchange rate indices are discussed and compared. Particular attention is given to the behaviour of the real exchange rate in the period since the float of the Australian dollar in December 1983. Our results confirm that a large part of the depreciation of the real exchange rate in 1985 and 1986 was eroded by the subsequent appreciation of the Australian dollar.